HUNDREDS of thousands of workers could be embroiled in a new pensions mis-selling scandal because they have been moved out of generous final salary schemes into inferior group personal pensions (GPPs).

Nearly 2m workers are paying into GPPs, which are essentially personal pensions into which employers also make a contribution.

These generally pay a lower pension than final-salary schemes and charges can be high, but many advisers have been recommending firms to switch to GPPs to line their pockets with fat commissions.

Simon Collins of the Association of Professional Compliance Consultants said: “We could be on the cusp of another mis-selling scandal as employees are transferred into GPPs when they should have stayed where they were or been recommended an alternative.”

Background

• Threat of fresh pension scandal

• Pensions savings cap set at £3,600

• Peers back pensions crisis fund

• Savers just forget about their pensions

• Plight of the A-Day pension prisoners

Retirement savings gone to pot?

Mark Atherton says that new rules for people with small sums in several pension schemes are more of a hindrance than a help

This warning follows a ruling by the City regulator, the Financial Services Authority, that banned Alexanders, a Swindon independent financial adviser, from certain activities for incorrectly advising 650 staff at a local manufacturing firm to transfer their pensions from deferred membership of a final-salary scheme to a GPP plan.

This raises the spectre of the pensions mis-selling scandal of the 1990s, when salesmen were encouraged by commissions to shift their clients out of valuable final-salary schemes into personal pensions.

Those in final-salary schemes receive a pension based on earnings at retirement but with a personal pension or GPP, retirement income is based on stock-market performance. Members therefore run the risk that the fund will not meet their expectations, whereas with a final-salary plan the employer carries all that risk.

Employers are increasingly trying to shift the cost to workers by closing final-salary schemes. Aon Consulting has estimated that half of employers with such plans could close them to contributions by 2011, trebling the number that have already done so.

GPPs are often unsuitable alternatives because workers tend to be put into poor-performing “default” funds run by life insurers.

Geoffrey Pointon of Pointon York Sipp Solutions, a Sipp provider, said: “By switching to a GPP scheme employees are potentially losing thousands of pounds in retirement savings and in addition, life offices tend to give very poor service, so savers can be left in the dark as to what they are investing in and how their fund is performing.”

There are also concerns that life insurers are abandoning their GPP plans. In March, Clerical Medical closed its GPP business because it said it was no longer profitable.

Jonathan Davies of Reynolds Porter Chamberlain, a pensions solicitor, said: “Group personal pensions offer employees an invidious choice. Many employers will contribute only if the employee joins their GPP, which means staff will lose a substantial payment if they don’t join.”

There is also concern that the government’s Personal Savings Accounts, due to come into force in 2012, may kill off GPPs altogether. Under this plan employers will be compelled to pay in 4% of salaries, with workers putting in 3% and 1% in tax relief.

But worries are growing that employers who now pay more than 4% will reduce contributions when personal accounts go live.

Anyone saving for retirement in a personal pension or GPP – assuming stock-market growth of 7% a year – needs to save 15% of earnings every year for 40 years to be able to retire with 50% of salary.

Those who want to retire on two-thirds of salary need to put away 20% of earnings every year for 40 years.

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